SIGNIFICANCE OF ESG: Overcoming Criticisms & Misunderstandings

IN RECENT YEARS, Environmental, Social, and Governance (ESG) investing has gained significant traction as investors increasingly recognise the importance of sustainable and responsible investment practices. However, despite its growing popularity, ESG continues to face criticisms and misunderstandings, particularly among fund managers in a few developed countries.

- Shailesh Haribhakti and Srinath Sridharan

One of the primary concerns raised by ESG bashers is the belief that ESG investments don’t generate substantial returns. They argue that prioritising environmental or social factors in investment decisions can hinder financial performance and ultimately harm the interests of investors. However, this perspective overlooks a mounting body of evidence suggesting otherwise. Numerous studies and analyses have shown that companies with strong ESG performance often exhibit superior long-term financial results. Robust ESG practices can enhance risk management, improve operational efficiency, and foster innovation, thereby contributing to sustainable value creation. While short-term fluctuations may occur, a more comprehensive view reveals the potential for long-term outperformance and risk mitigation through ESG integration.

Furthermore, the global investment landscape is evolving rapidly, and investor preferences are shifting. Today, investors increasingly consider factors beyond financial returns, seeking investments that align with their values and contribute positively to society. Fund managers who dismiss ESG investment opportunities risk alienating a significant and growing portion of their client base. To remain competitive and attract capital, fund managers must adapt to evolving investor expectations and integrate ESG considerations into their strategies.